CLA-2 CO:R:C:V 556933
Leslie Alan Glick, Esq.
Porter, Wright, Morris & Arthur
1233 20th Street, N.W.
Washington, D.C. 20036-2395
RE: Eligibility of NOVAZONE-AS for duty-free treatment
under the GSP; double substantial transformation;
section 10.177(a); Azteca; Torrington; T.D. 77-273
Dear Mr. Glick:
This is in reference to your letters dated September 17, 1992
and October 20, 1992, concerning the eligibility for duty-free
treatment under the Generalized System of Preferences (GSP) of
NOVAZONE-AS, a chemical product manufactured by Novaquim S.A. de
C.V. ("Novaquim") in Mexico and exported to the U.S. This product
is used as an antioxidant, antizonant, antiflex cracking agent, and
metal deactivator in natural and synthetic rubber.
FACTS:
NOVAZONE-AS is primarily a mixture of three major components:
N-phenil-N' - (ortho-tolyl) para-phenylenediamine, N, N' -dyphenil-
para-phenylenediamine, and N, N'di (ortho-tolyl) para-
phenylenediamine. Smaller amounts of dyaril amine and arylamino
phenols exist as byproducts of the reaction. The materials used
to produce NOVAZONE-AS were initially sourced from Mexico, but due
to the unavailability of these materials at the present time, they
will be sourced from other countries, primarily from the U.S.
The chemical reaction process consists of condensing one mole
of hydroquinine with a mole of aniline and a mole of o-toluidine
in the presence of a catalyst. Two moles of water, produced by the
reaction, are continuously removed and the recovered amines are
recycled during the condensation.
In the first intermediate stage, anyline is combined with
hydroquinine and Ferric Chloride to produce para-anylinophenol
(monoarylated). At the same time, o-toludine is combined with
hidroquinine and Ferric Chloride to produce para(ortho-toluidino)
phenol (monoarylated). During this first intermediate stage of
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transformation, there is a change in the chemical structure of
the two intermediate products from the products used to manufacture
them.
Production of the final article is a result of similar
chemical reactions of the two intermediate products produced in the
first stage. Initially, para-anylinophenol is combined with
aniline and Ferric Chloride to produce diphenyl para-
phenylenediamine. Para-anylinophenol also is combined with ortho-
toludine and Ferric Chloride to produce N-phenyl-N' -ortho-para-
phenylenediamine. N-phenyl-N' -ortho-tolyl-para-phenylenediamine
is also produced at the same time as a result of the combination
of aniline, para(ortho-toluidino) phenol and water. Ortho-
toluidine is similarly combined with para-(ortho-toluidino) phenol
to produce di(ortho-tolyl)-para-phenyllenediamine. Byproduct
reactions produce di(ortho-tolyl)amine and ammonia, 2-methyl
diphenylamine and ammonia, and Mono-arylated hydroquinone.
Upon completion of the reaction, the batch is cooled and the
catalyst converted to an insoluble iron salt by the addition of
trysodiam phosphate and water. The excess amines and water are
removed by filtration. The foregoing process is illustrated in a
chart identified in your submission as Exhibit 1.
ISSUE:
Whether the production of NOVAZONE-AS results in a double
substantial transformation for purposes of including the cost or
value of the materials imported into Mexico in the 35% value
content requirement under the GSP.
LAW & ANALYSIS:
Under the GSP, eligible articles the growth, product, or
manufacture of a designated beneficiary developing country (BDC),
which are imported directly into the U.S., qualify for duty-free
treatment if the sum of 1) the cost or value of the materials
produced in the BDC, plus 2) the direct costs involved in
processing the eligible article in the BDC is at least 35% of the
article's appraised value at the time it is entered into the U.S.
See 19 U.S.C. 2463.
As stated in General Note 3(c)(ii)(A), Harmonized Tariff
Schedule of the United States Annotated (HTSUSA), Mexico is a
designated BDC. You have also stated that the product will be
entered under subheading 3812.30.20, HTSUS, a GSP-eligible
provision.
If an article is comprised of materials that are imported into
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the BDC, the cost or value of these materials may be included in
calculating the 35% value requirement only if they undergo a
"double substantial transformation" in the BDC. See section
10.177(a), Customs Regulations (19 CFR 10.177(a)), and Azteca
Milling Co. v. United States, 703 F.Supp. 949 (CIT 1988), aff'd 890
F.2d 1150 (Fed. Cir. 1989). The basis for the substantial
transformation concept was expressed by the U.S. Supreme Court in
Anheuser-Busch Brewing Association v. United States, 207 U.S. 556
(1908), which stated:
[m]anufacture implies a change, but every change is not
manufacture, and yet every change in an article is the
result of treatment, labor and manipulation. But
something more is necessary,.... There must be a
transformation; a new and different article must emerge
'having a distinctive name, character or use.'
Current court cases have continued this concept, holding that a
substantial transformation occurs "when an article emerges from a
manufacturing process with a new name, character or use which
differs from that possessed by the article prior to processing."
Texas Instruments, Inc. v. United States, 69 CCPA 152, 156, 681
F.2d 778 (1982).
In order to achieve a "double substantial transformation",
however, the materials imported into the BDC must be substantially
transformed into a new or different intermediate article of
commerce, which is substantially transformed a second time into the
final article. The intermediate article itself must be an article
of commerce, which must be "readily susceptible of trade, and be
an item that persons might well wish to buy and acquire for their
own purposes of consumption or production." Torrington Co. v.
United States, 8 CIT 150, 596 F. Supp. 1083 (1984), aff'd, 764 F.2d
1563 (Fed. Cir. 1985).
In support of this statement, the appellate court in
Torrington cited with approval T.D.77-273, 11 Cust. Bull. 557
(1977). In that case, the Government held that the dual
substantial transformation standard was not satisfied with the
production of dichloro, an intermediate step in the production of
technical atrazine. Even though the dichloro differed chemically
from the constituent articles from which it was made and the final
article, it was not considered an article of commerce, since the
process used to manufacture the atrazine was a continuous one, and
thus, the dichloro was not generally bought and sold. The dichloro
that resulted from the first step of the manufacturing process
would have to be refined in order to make shipping practicable.
The court in Azteca relied on the Government's reasoning in T.D.
77-273 in determining that certain intermediate products produced
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from U.S. grown corn were not articles of commerce. (The final
product was various cereal breakfast foods.)
In the instant case, review of the chemical literature shows
that production of the two claimed intermediates is possible under
separate controlled conditions. Under these controlled conditions,
equal amounts of aniline and hydroquinine can be reacted to produce
para-anilino phenol. Para-anilinophenol is a stable compound and
is available commercially. Also, equal amounts of o-toluidine and
hydroquinine can be reacted to produce para(ortho-toluidino)phenol.
However, there is no evidence submitted that this product is
commercially available.
In addition, in the process used to produce the final product,
the raw materials are mixed together from the beginning of the
reaction. The production of the two intermediates occurs at the
same time, i.e., both reactions take place at the same time and
both intermediates coexist in the same reaction vessel. In other
words, as the intermediates are formed, they undergo the second
reaction to form the end product. The reaction does not stop until
NOVAZONE-AS is produced. The manufacturing process, from starting
materials to final product, is continuous. There is no evidence
of an existing market for the mixture of intermediates in its
unrefined form. Thus, the isolation of this unique mixture of
intermediates cannot be economically viable using this
manufacturing process.
The facts in T.D. 77-273, supra, are directly in point. As
in that ruling, the process used to produce the NOVAZONE-AS is a
continuous process, and there is no apparent market for the
intermediate products in their unrefined state. Even in a refined
state, there appears to be no commercial market for para(ortho-
toluidino)phenol. Accordingly, the intermediate products are not
considered substantially transformed constituent materials. As a
result, the production of NOVAZONE-AS constitutes a single
substantial transformation.
HOLDING:
The production of NOVAZONE-AS in Mexico constitutes a single
substantial transformation. As a result, the cost or value of the
U.S. and other materials imported into Mexico for purposes of
producing NOVAZONE-AS cannot be included in determining the 35%
value content requirement under the GSP.
Sincerely,
John Durant, Director
Commercial Rulings Division